New Thinking Blog: Book Review of the Carbon Crunch

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New Thinking Blog: Book Review of the Carbon Crunch

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Prof. Catherine Mitchell, IGov Team – 29th January 2013.

BOOK REVIEW

Overview

It is an important time for climate and energy policy decision-making in the UK, and Dieter Helm’s book The Carbon Crunch: How we’re getting climate change wrong – and how to fix it purports to provide the ‘right’ answers. His book is divided into three parts: Why should we worry about climate change? Why is so little being achieved? What should be done? There is no doubt that this is a timely book; it has stimulated welcome debate; and some of its arguments make sense and are interesting. Ultimately, however, it presents simplistic policy solutions which are either unrealistic and/or based on narrow analyses which undermine their credibility.

The Critique

Helm makes a number of powerful critiques of current climate change mitigation policy.  He describes well the scale of the climate change challenge and the woeful failure of international governance to rein in those emissions. He recognises the importance of ethics within policy, both domestically and internationally; and he explains the drivers of increasing global energy use and carbon consumption, shows where it occurs and the catastrophic impact coal plays within it.

Part Two lets loose a critique of current UK energy policies,  particularly related to ‘current’ renewable energy,  which he says are expensive and inherently inefficient; energy saving policies which he says have not reduced energy use; and to a lesser extent nuclear power,  which he argues is expensive and has waste issues. Clearly, he has references and some of what he argues has elements of reality, but he is not reflecting the full body and balance of evidence.  

The Solutions

Having seen the policies which are in place demolished, the reader is ready to know in Section 3 what Helm’s solutions are and it is at this point that the book really fails to deliver on expectations. The British climate change policy conundrum could be solved, according to Helm, if we implemented a domestic carbon tax (with a learning-by-taxing process so that it is raised until it achieves a 450 ppm CO2 target) matched with a border tax with border carbon adjustments on imported carbon products; a re-focussing away from spending money on current renewable energy and energy saving mechanisms to increased research and development expenditure (on improving current technologies, encouraging a convergence between communication and energy technologies, storage and battery technology and new electricity generating technologies). Working together, these solutions would provide appropriate signals to enable the market to decide what direction to follow, but one effect would be to move from coal to gas as a short to medium term transitional fuel.

It is not that these policies would not be beneficial – yes, it would be helpful to have a carbon tax high enough to alter consumption without any deleterious effects; a border tax which did develop into a global governance scheme without worries about protectionism or trade disagreements; yes, it would be wonderful if to have effective ‘future’ technologies, although he is much harder on ‘current’ renewable energy technologies than is warranted; and yes, a gas transition from coal and then into these future technologies at the right time and without a danger of locking into gas, rising prices, increasing security concerns or missing our carbon reduction targets is just what we want.

Helm’s solutions are, however, politically or technically unrealistic and together strengthen the status quo, particularly the position of natural gas.

Critique of Helm’s Analysis and Solutions

Misunderstanding of technology policy

Given that renewable energy has been widely supported since 1990, there is a great deal of evidence about what policies are successful in terms of deployment; cost reduction and so on. We know that learning by doing through deployment as a result of the market pull technology specific policies creates a virtuous cycle when linked to R&D, so Helm’s focus on R&D without the market pull will be less effective. Similarly, we know innovation occurs incrementally. ‘Future’ renewable energy technologies will develop out of ‘current’ renewable energy technologies, and therefore this argument that somehow current renewable are put on hold until these ‘future’ renewable technologies develop is just not possible.  Moreover, even if this were not evidenced, contrary to the Helm argument, it is not possible for Britain to wait until these ‘future’ renewable have developed for us to then ‘buy’ them in. A technology does not exist in a vacuum. It needs an enabling environment for it to prosper – this means skills, planning laws, electricity market rules and standards, license conditions and so on. These develop in a complex, interwoven manner with the energy technology itself. And finally, the IEA recently argued in the 2012 World Energy Outlook that waiting until post 2020 for climate change mitigation investment will cost 3-4 times more than any pre 2020 investment.

Investor concerns ignored

A central aspect of Helm’s argument is that a non-specific carbon tax in Britain enables the economics of carbon mitigation to drive the choice, rather than some inefficient policy maker or regulator ‘picking a winner’. Britain, of course, does have a unilateral carbon tax in place (rising to £70/t of carbon by 2030), although its very unilateralism causes investors to wonder how certain it is. Helm argues that the domestic carbon tax combined with increased expenditure on research and development rather than continuing a specific support mechanism for renewable energy or energy saving  would bring forward cheap, efficient low carbon technologies thereby leading to the most economic means of mitigation. This is conventional economic policy. And this, of course, is just one aspect of the long running disagreement between letting markets decide as the best way to ensure the best outcome of the economy (as supported by the Treasury, Hayek, some economists, economic theory) and the importance of focussed spending to save capitalism from itself and restart the economy (as supported by some elements of the Labour Party, Keynes, technology and innovation policy, evidence of practice). In this micro real world instance, however, there is no evidence that a carbon policy works in terms of developing new technologies.  More, there is much evidence that it does not.  Entrepreneurs and investors require confidence that their investment will receive a certain return in a market. A sector wide carbon tax is not enough on its own to provide confidence that this will happen. Technology specific support is required, and this realisation comes from evidence. One example of this concerns nuclear power in the UK.

Political feasibility of border tax and border adjustments

Helm is extremely critical of current international governance – the Kyoto Protocol. His solution is to impose a carbon tax on domestic products and a border tax on imported products, with adjustments to take account of whether the exporting country already has a tax or trading scheme in place. This he argues would provide an incentive for the exporting country to implement a carbon tax so that they, rather than the importing country, receive the revenues. This then provides an overall incentive for countries to implement carbon taxes and together this could develop into a global governance scheme. All of which is which sounds sensible and is very neat except that it takes no account of political realities around fears of tit-for-tat protectionism and trade issues.

The unlikely role of gas

Helm’s final piece of the jigsaw, which he sees as the outcome of his solutions, is for gas to displace coal and to be the short to medium term transitional fuel until these ‘future’, including renewable energy, technologies kick in. This requires abundant global gas and although we know the recent shale gas finds have increased the global gas resource we still do not know what either its environmental or economic costs will be, particularly if large swathes of the globe move to gas. This policy therefore risks security and (increasing) price problems; including greater numbers of fuel poverty.

Helm’s solutions would work virtuously together. Thus, the short term move from coal to gas will transition to the new effective technologies, including ‘future’ renewable and it is this timely move which means that successful climate change mitigation occurs.  We will not rely too heavily on gas; we will not use it beyond the 450ppm; and we will be able to transition to future technologies in a timely fashion. As shown above, technology policy just does not work like this; nor does investment; and it is also extremely unlikely that fossil fuel lobby would accept it. A remarkable aspect of the book is that while Helm is very critical of the green movement and lobby he does not mention the fossil fuel lobby at all, nor the lobby intent on keeping the current energy system going.    

The Political Influence of Dieter Helm

All in all therefore, Helms solutions do not offer much help to the current situation. And this raises the question of why it is that Helm wealds such influence.  

Helm’s book illuminates himself through his critiques and solutions as a conventional economist who avoids dealing with messy political and investor realities.  In one sense therefore, the book should be irrelevant to current climate change mitigation, including energy, decision-making. However, Helm has achieved a position of communication which is unique in the UK – no other energy system participant, academic or otherwise, is as well known as he is outside of the energy sector. Moreover, he holds important positions within it: currently he is Independent Chair of the Defra Natural Capital Committee and he is a member of the Economic Advisory Group to the UK Secretary of State for Energy and Climate Change; and he has held others for the last 20 years.  This makes him very politically important: not as an explainer of policy but as an advocate of a particular policy.  If his policy solutions are unrealistic or unhelpful to climate change mitigation, as this (and other) reviews argue they are, then that makes the delivery of a realistic climate change mitigation policy even more difficult to occur. 

Maintaining the Status Quo

One of Helm’s many skills is that he is able to make something so fascinating and complex as energy policy sound so simple (in part because he does avoid political realities) and this is understandably attractive for some audiences. But they should beware being distracted by his flawed arguments. Unfortunately there are no simple answers for tackling climate change and this is a much less attractive message.  

As touched on above, Helm lays the blame for the poor state of climate change policies at the feet of green politicians, particularly in Europe, and green NGOs. His analysis is undermined by his failure to include the impact of the fossil fuel lobby or those incumbents who want the current system to continue. The effect of this is to neglect a discussion of the difficulties of undertaking change within the current system.  His solution of imposing a carbon tax rather than specific technology policies, de facto supports the current system. Helm’s ‘gas as a transition fuel’ argument also supports the conventional gas industry. This is because the technologies that gas is meant to be transitioning to – these ‘future’ renewable technologies that Helm talks about – will not be there unless there is strong technology specific support for them now. Without specific technology support, gas will continue as the dominant fuel and we will miss our carbon reduction targets. For all Helm’s arguing that current climate change policies have been so unsuccessful, his solutions are supporting the status quo. Any company or politician who does not want to change the energy system, or is critical of Europe, will like and support Helm’s argument.

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